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It is a piece of equipment that is mentioned as once being possessed by the Daedric Prince, Nocturnal. Because Nocturnal is revered as the "Mistress of Shadow," and is depicted as a woman wearing a grey cloak and cowl, the artifact is attributed with stealth and secrecy. Legend holds that it renders the wearer completely invisible to mortal eyes. It is notably worn by the Grey Fox, who stole it from her.
The cowl was stolen from Nocturnal by a thief named Emer Dareloth, the first grandmaster of the Thieves Guild. After the theft, Nocturnal cursed the cowl so that whomever wore it would be erased from history; all who knew that person would subsequently forget who they were. This caused CountCorvus Umbranox, otherwise known as the Grey Fox to the Thieves Guild, to lose his royal ties when he came into possession of it. His wife Millona's memory of him fogged, and she suspected him of having run away, forsaking his marriage vows. Desperate to remove the curse from the cowl, return to his position as Count, and rekindle his marriage, he employed the Hero of Kvatch to steal an Elder Scroll. Succeeding in doing so, the Count was able to break the curse, remove the cowl, and return to his wife. It is believed that the hero retained the cowl and assumed the mantle of the Grey Fox.
While wearing the cowl, one's fame drops to 0, while their infamy rises to 100. Many NPC's will also have different reactions upon engaging in conversation with the wearer. Most notably, all members of the Thieves Guild and all beggars will start speak in awe to the wearer, with the impression that they are speaking to the Gray Fox himself.
Additionally, wearing the cowl in public accumulates a 500 bounty, and all guards attack the wearer on sight with no option to pay off the bounty or yield. This bounty can not be removed by Armand Christophe or S'krivva
The only way to remove this bounty is to either unequip the Cowl or to use the console command "setcrimegold 0," which will change the target's bounty to 0 . When executing this second option, however, the wearer cannot speak to any guards, or else they will be treated as if they have a bounty.
Although legend holds that the wearer becomes Invisible, this is not a trait garnered upon wearing it.
Trivia
Inscribed on the front of the cowl are the words, , which, in the Daedric alphabet mean, "Shadow Hide Ou". The "y" was omitted. The phrase is used by members of the Thieves Guild, as well as Nightingales. The latter believe that, upon death, they are merged with the shadows, covered by a cloak of protection and enigma. The root of the phrase is believed to stem from this after-life mythos.